Get a 6.5% Yield With a Stew of Junk Bonds

Too many cooks have yet to spoil the broth at Northern Multi-Manager High Yield Opportunity (symbol NMHYX), which divides its assets among three firms, each with its own philosophy for buying bonds with below-average credit ratings. Northern’s Chris Vella, who oversees the portfolio, says the strategies offer three different ways to generate market-beating returns. High Yield Opportunity, as a unified entity, hasn’t always achieved that goal, but over the past year it ranked in the top 5% of all junk-bond mutual funds.

Vella gives the subadvisers considerable autonomy over their chunks of the portfolio. Neuberger Berman, which manages 40% of the $312 million fund’s assets, uses what Vella calls a “traditional” high-yield strategy to assemble a diversified package of bonds with below-investment-grade credit ratings. DDJ Capital (30% of assets) invests mostly in debt of midsize firms, with a large allocation to floating-rate bank loans. Nomura (also 30%) uses big-picture analysis of the high-yield market to select bonds.

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The fund yields a lusty 6.5%, thanks to a sizable allocation (70% of assets) to bonds rated single-B or below. Junk bonds are vulnerable to a recession or financial crisis. But the fund should be able to withstand rising interest rates better than investment-grade bond funds (rates and bond prices move in opposite directions).